NEW REPORT! Understanding The Apparent Mismatch Between Current Economic Conditions and the Financial System

[Steven Vincent]

Summary

• Existing theories of economics and the financial system cannot match successfully with current conditions.
• Long term data on stock index breadth, corporate earnings, Treasury yields and S&P 500 dividend yield strongly suggest a fundamental break with the past is in progress.
• Past economic and financial system models, analytical tools and metrics will have to be entirely reconsidered and reconstructed.
• The Secular Systemic Shift now underway is so profound and so far-reaching and so all-encompassing that it is probably analogous to the shift occasioned by the Age of Enlightenment, the Scientific Revolution, the American Revolution and (later) the Industrial Revolution.

Recently, in the wake of the dramatic, catalyzing events associated with the COVID-19 pandemic, analysts have struggled to match the action in the Economy with that of the Financial System. Existing disparities of inequality and maldistribution have been dramatically exacerbated as the financial indices have soared.  In no quarter is there found any real explanation for the utter failure of all existent theories to anticipate or explain our current experience. The general reaction is one of befuddled annoyance. Irrespective of viewpoint, left or right, economists and market analysts are trying to figure out why the emergent reality does not conform to their model of how things should be and the default tendency is to wag a finger of blame at the other side of the aisle.

THEORIES

Let’s examine the current existing views on the mismatch between the economic crisis and the action in the financial system.

The “Disconnect Theory” retreads the Austrian view that has been around since Nixon first disconnected the dollar from the gold standard. It basically states that action in the Financial System is so far our of whack with the metrics of what are generally perceived to be “The Fundamentals” that, eventually, this disparity will have to collapse in on itself.

The “Fed Theory” is an extension of the time-honored neo-Keynesian “Don’t Fight the Fed” party line. It abandons any pretense of analysis and advocates for a fully lobotomized world-view. “Don’t bother to make any sense of it at all…cuz Fed”.

The minority "Fundamentalist Theory" assures us that the action in the Financial System is reflecting something fundamental.  Most often that "something" is defined well within the parameters of established economic performance metrics.  We are assured that GDP, employment, corporate profits, P/E ratios and other time-honored measures will inevitably reflect the soaring valuations being priced into the Nasdaq 100 and S&P 500.

The "Secular Systemic Shift Theory", an outlier minority viewpoint, sees the current period as a transition to a fundamentally new underlying economics requiring a thorough update and revision of all economic theory and a new set of analytical tools.  This is a variant on the Strauss/Howe "Fourth Turning" generational shift perspective.  While most "Fourth Turning" advocates see the current situation as a transition within the same Capitalist system, the proponents of this view see the present shift as both Secular and Systemic.

At BullBear Trading, we have been tracking the arrival of a “Secular Shift”, a phenomenon roughly equivalent to the Strauss/Howe “Fourth Turning”, since 2012. In 2018 I started to identify 2020 as the year that the “Shift” would make itself known. The combination of financial and economic crisis, de facto Civil War and de facto major power war between the US and China is the symptomatic manifestation of an underlying fundamental, systemic paradigm shift in progress.

In a recent essay, “Information is the New Capital”, I began to introduce some elements of a correlated paradigmatic shift into our understanding of Economics and its application to the Financial System.  I recommend that readers have a look at that before they dive into the present analysis...

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